Dear Wise Investor,

You may have come to this page for the answer to the market crash trivia question:

What percentage did the S&P 500 crash in the first week after Lehman Brothers collapsed in September 2008?

Answer: It didn't drop at all!! Lehman Brothers collapsed on the morning of Monday, September 15, 2008. The prior Friday, Sept. 12, the S&P 500 had closed at 1,251.69. And by the end of the week, Friday, Sept. 19, it closed a few points higher, at 1,255.07!

Even the next week was only moderately bad: The S&P fell 3.3% to 1,213.27. Only in the following two weeks did the stock market really crash: down 9.4% to 1,099.23 on Oct. 3 and down another 18.2% to 899.22 on Oct. 10.

The surprising conclusion is that investors had a whole TWO WEEKS after the collapse of Lehman Brothers to get out of the stock market relatively unharmed in the crash of 2008-2009!

But clearly most investors failed to do so. The point is, they didn't realize what was coming, even after Lehman Brothers.

 

Things will likely be different in the next crash. In 2008 investors were slow to react because they hadn't seen anything like such a crash in their lifetimes. The collapse of the dot-com bubble in 2000 and the bear market after it were bad, but not 2008 bad. It truly was the worst U.S. stock market crash since 1929.

But if a crash occurs this year, next year, or any time in the rest of this decade, it will happen to investors who have the memory of 2008 still vivid in their minds. If there is a negative shock like Lehman Brothers now, this time the reaction won't be so slow. The impact will be much more immediate and dramatic: a severe "flash crash". You won't have so much time, if any time, to get out.

 

We've never seen a double-whammy of two massive stock market crashes within a decade of each other in the United States. Well, there was a pretty bad crash in 1937, eight years after the Crash of 1929. But circumstances now are very, very different than they were in 1937. People in our society right now don't believe we're in a Depression. Times are very tough for an awful lot of people in America right now, a lot more than most market analysts care to admit most of the time. But in the 1930s there was a cultural feeling that came with the Great Depression, and that cultural feeling doesn't exist in our society today. So a second market crash would be much more of a SHOCK today than it was in 1937.

Further, the type of people investing in the stock market today are very different from the investors of 1937. The Crash of 1929 shook all the amateur investors out of the stock market for a generation or more. They weren't around in 1937 or a long, long time after that. The stock market didn't become "cool" again until the mid-1980s! Since then, and especially since the mid-1990s with the internet, online investing, and the dot-com boom, "retail investors" poured back into the market. The crashes of 2000 and 2008 shook people out, but unlike after 1929, today the retail investors have returned to the stock market in droves.

 

So now we have an army of "average investors" back in the market, but with the memory of the 2008 crash still fresh in their minds. This is an unprecedented situation in the history of the American stock market. And it is a very, very dangerous combination.

The volume of amateur investors promises a mass exodus from the market when it turns sour. And even worse, the memory of 2008 means the mass exodus will happen more immediately, more quickly, and more severely.

 

Dr. Strangemarket